John Mavridis and Newhouse Strategic Counsel

While I have been focusing my contributions to this Blog on Business and Law, it has been said that one should mind politics before politics starts minding you.  The events on the Canadian political scene over the last week, and the coming days, requires that we concentrate our thoughts on the risks of the reaction of the government to the decision of the majority of the members of the House of Commons to withdraw their confidence from the Government.

Stephen Harper Intimidates Parliament

There is no crisis in the House of Commons if the Members of Parliament are permitted to follow and be governed by the rules of Parliament.

There is a crisis in the Government trying to hold on to power.  There is a crisis inside the Conservative Party of Canada which needs to come to grips with the tactics they adopted that created their crisis.

But the House of Commons will bring an end to these crises with a simple vote.

I explain below the dangers to Canada’s democracy if the suspension of Parliament is permitted so that the Conservative Party of Canada, under the leadership of Stephen Harper, can mount a lavish and expensive publicly-funded campaign to intimidate the Members of the House of Commons.

Necessary to Respect the Institutions of Canadian Democracy

The Canada Act of 1867 intended  that Canada would have peace, order and good government.  This is the guiding principle of that our parliamentary institutions have been implementing.

At the last election, there was no majority of members of one party elected to the House of Commons.  Therefore, the Government that was formed has to work to continue to enjoy the confidence of the House of Commons.

In the last week, it has come to pass that the Government does not enjoy the confidence of the House and a motion has been duly tabled to test this resolution in a vote of the Members to take place on December 8, 2008.

The Leader of the Official Opposition has written to Her Excellency, the Governor-General of Canada, confirming that the majority of the Members of the House, comprised of the Liberals and the NDP and supported by the NDP, are willing to collaborate on the formation of a government.

It is now reported that the Governor-General is entertaining the request of the Prime-Minister to prorogue the House of Commons and allow the Government to come back to the House with a new Speech from the Throne which will then be tested by a vote of confidence.

In the normal course, this appears to be a reasonable course of action.  However, constitutional convention will not be exercised in a vacuum.

Use all legal means …he did not say legitimate

The Prime Minister of Canada announced to the House that he would use all “legal means” to prevent a “socialist-separatist” coalition from “illegally” taking power.

“Legal means” do not necessarily imply “legitimate means”.

I respectfully submit that the approach that is now being taken by the Conservative Party of Canada to buy time on radio and television stations, and provide all material support to organize rallies against the position of the majority of the Members of the House of Commons is an illegitimate means.

This will now be a full campaign which is not governed by the principles of campaign finance in Canada.  The Conservative Party will use donations, which have benefited from a taxpayer’s subsidy to the extent of $75 out of a typical $100 contribution, to drown-out the opposing view on the airwaves and create and manufacture dissent to the proposed coalition in the media.  This campaign which will be waged to raise public anger against members of the opposition parties, has one objective: use public pressure (”mob-rule”) to intimidate Members of the House of Commons into voting against the motion of non-confidence.

In today’s context, proroguing Parliament and allowing this campaign to be mounted will lead to divisions and uncertainty that the citizens of Canada do not merit.  It may all be legal, but it is not legitimate.

The Rights of Parliament

Parliament is sovereign in how it will govern itself.

The right of the Prime Minister to ask for prorogation, exists, but then so does the right of the Governor-General to refuse to prorogue.

In the current context, allowing a vote to take place will test the confidence of the House of Commons in the Government.  It has been reported that the Prime Minister is making entreaties to Members from all Parties for their support.  This is the proper campaign that our Parliamentary democracy deserves.

To allow a Government to continue in place, by shutting down Parliament, when a vote has been called on a motion of confidence, will do a major disservice to the confidence held by the people in the institutions that the Governor-General as the Head of State of Canada, in Right of the Queen, has been charged to protect.

Allowing Parliament to exercise sovereignty over itself is the only reasonable course of conduct in light of the proclaimed intentions to mount a public campaign, when the decision belongs to the Members.

The Rights of Members of Parliament

The Members of Parliament have been elected by their constituents to represent them in the House of Commons. While they may be ideological adversaries on numerous issues, they have all been charged with their role.

The Members from the Political Party with the most seats have been called to form a government, not by the people but by the Governor-General.  The others form the Opposition Parties.  Each Member has the rights and privileges provided to all members.

Having the rights of some colleagues, who are ideological adversaries, be derided, is a first foot on a slippery slope towards the demise of any institution.

Mob Rule

Allowing the Conservative Party of Canada to create public pressure and dissent against the Members of the House and intimidate them to keep the Conservative Government in power is a dangerous precedent in Canada. This is an unacceptable and dangerous path towards holding power.

One historical comparison of the firing of the Reichstag and having Brown Shirts take to the streets may appear extreme, but it is only a difference in degree.

Mob Rule is not a substitute for Peace, Order and Good Government.

Conclusion

Do not prorogue.  Let the vote of confidence occur and we will see the opposition parties take on their responsibility.  Allowing prorogation, in a context where the Prime Minister will take all legal means to hold onto power, ignores the democaratic institutions of Canada and allows a campaign of intimidation to commence.

Respectfully submitted,

John Mavridis

Applying the general principles of creditor protection and restructuring to the auto-industry cannot work for one conceptual reason.  The average restructuring is a somewhat isolated affair. The company decides how it will address its ailments (too much debt) and then it will do what the rules permit.  There will certainly be some creditors who are hurt - but the reverberations will be limited.

The auto-industry though is one huge pond.

Not only are the employees of the Big Three at risk, but the multitude of suppliers and their respective employees.

You throw one rock into that pond and the ripples risk rocking entire communities and impacting the future industrial capacity of North America.  

This problem is too important to simply leave to the managers that have allowed this problem to be created - even if they are willing ro work for $1 a year.

Create Barriers to the RIpple Effects

There will be ripples, but these have to be anticipated and barriers have to be built around them to limit how far they will go.

Jobs will be lost. Are there social programs to support, retrain and allow employees to maintain their work life, even if it is taken apart?

Some of the companies in the supply chain in a re-tooled industry, may not survive.  If everything changes, there will be some companies that will only survive if there is sufficient financial support  to allow for re-tooling. 

In an economy where the Banks are not lending, the US Treasury may act as a guarantor or a back-stop.  Otherwise, there may not be any opportunity to solve this problem.

Creating a special Chapter 11 section for the Big 3 may be a solution. Congress is now engaged!

 Prioritize The Objectives.

 In the current economic crisis prioritizing objectives is easy - Save Jobs so as to avoid adding to a downward spiral.

This one is clearly a priority.  It can only happen if the car business is sustained, reformed and grows.

Clean-up the debt; but not in the context of a bankruptcy where creditors may hope to get a few cents on the dollar.  While that is how the restructuring industry is built there will be too much collateral damage across America.

There needs to be a cash inflow to allow the Big Three to pay their bills. The government cannot afford to simply hand-out bail- out funds only to have them be hoarded by GM, Chrysler and Ford, bracing for the next blow, and not paying their debts.

Plan for the future.

There will need to be a loosening of the anti-trust regulation to allow the industry to stop its wasteful habits, new car models every six-to- eight months is more than is necessary.  You can also build them the way that Dell builds computers (on demand)!

This is also perhaps the tool that will address energy independence by pushing the car companies to change the type of cars they build.

It is one tough problem.

Anytime a company enters a creditor protection phase, the organization is about to enter into a storm so that it can come out stronger.

During any creditor protection plan, there will be many demands and a lot of noise from inside and outside an organization.  You need to be able to ignore the noise and focus on the job at hand.

Having participated inside management during a restructuring, I know how difficult this can be, but it is only by ignoring the noise, focusing on objectives and taking the next step in the process that you will be able to get through this successfully.

In the case of a public company or a Venture Capital-backed venture, shareholders are the key stakeholders.

By the time you finish the creditor protection process, your creditors may be a big part of your shareholder base.  As when building the company, issuing shares could be a part of the solution when you make an offer to your creditors.

This of course can be a managed process, and that is a subject of another paper.  Be that as it may, this will be a process that you should address with any major shareholders.  The attitude, both of the Courts and the insolvency lawyers, will be that the shareholders are of no consequence in this process. While this may be the approach that insolvency professionals have, you have to look at the big picture - not only today, but for the future. 

Ensure that you can win the vote of the creditors on the proposal you will make to them.

This can happen because the debtor company benefits from the impact that court-sanctioned creditor protection strategy has on most creditors.  If your company fails in its restructuring, they will probably get nothing.  In fact, the practical reality is that they may very well have essentially written off your debt from their books.  If your debt is over 90-120 days old, they most probably cannot have it financed by their banks. They know that if the restructuring fails, they will lose everything.  Not only the amounts owed, but also a client (even one they service C.O.D., or with a bank-guarantee).

Another tool in your arsenal is that you can divide the creditors into classes.  While some classes, such as secured creditors, are already defined, others can be sub-categorized.  In this way, since the rules call for over half the creditors in number and two-thirds in value to approve the proposal, you can line up your ducks.

You can structure the proposal to gain the vote of the majority of the creditors in number by ensuring that the “small” creditors, owed between $1 and $10,000 (for example) will be paid in full, or as close to in full as necessary, to get their vote supporting the company’s proposal. For the value issue, there has to be a plan on how you will work with your biggest creditors to get through the process.  Always remember that they also have a problem: their alternative in a potential bankruptcy is not positive.  This is their problem which will be used as a wedge to help you negotiate the acceptance of the proposal.

In any creditor reorganization, there is always a cast of characters to take the stage.   While some are on your side, you must have a strategy for each one of them.  They all have their respective likely courses of action, since the law allows them to do only so much.  You have to anticipate and determine a strategy to handle each of them. The players in this drama include:

·         The Court which allows you some protection from creditors, by applying the law.

·         The Trustee in Bankruptcy who is a professional who is also an officer of the Court whom you will hire to assist you in managing the process with the creditors.  He will send out the notices to the creditors and work with you and your lawyers in the process of obtaining their approval for the proposal.

·         The Secured Creditors.  These are your banks, and mortgage holders, but may also include government and taxation agencies.  Each of them will have their own lawyer.

·         The Trade Creditors.  You owe money to each of these suppliers whose goods your company has used and for whom your company has historically been a very good client.  Some are key to your continued operations and some are not.  The larger ones will probably engage their own lawyers in order to monitor the process and attempt to maximize their position.

·         The Landlord. He will also probably have his own lawyer.

·         Your Lawyer will be working on your behalf in this matter. He will be making the necessary representations on behalf of your company before the Court and deal with the others in the context of negotiation.

·         Your Restructuring Officer.  This is the key management representative that is watching and managing this drama at work and ensuring that the company meets its objective.

You will be paying (at least) for your own lawyer, probably the lawyer of your banker and the Banruptcy Trustee working on the Proposal. You will also have to cover the time and effort of your key managers involved in this process, on top of their usual responsibilities.

When you are in real financial trouble, you still have tools available to you and need to understand how to use them.

When you have exhausted your ability to continue negotiating with your creditors, the law provides for alternatives. In the US, it is the Chapter 11 provisions of the US Bankruptcy Code.  In Canada there is a proposal under the Bankruptcy and Insolvency Act or a proposal under the Companies Creditors Arrangements Act.

There are technical aspects to each of these tools, but the essence remains the same:

First, the law gives you some peace and quiet: there is an immediate stay of proceedings.  That means that if suppliers are suing you, or even petitioning your company into bankruptcy, everything is suspended.  You can get the necessary time to organize your affairs and make an orderly proposal to creditors.

The debtor company will get an initial stay for 30 days and you will most probably be able to extend it for an additional 45- 60 days in all.  Additional delay may be possible, but you will have to make a proposal to creditors by then.

The key is to know what you owe and to whom.  Determine which debts are secured, since you will eventually need the approval of these creditors. It is also important to clearly understand which debts may become the personal liability of the members of the Board of Directors.  Review your agreements and the law on various liabilities, including:

·          leases, (there is a right to repudiate them under certain circumstances).

·          employees, (including severance  obligations).

·          taxes, (where certain taxes are also personal liabilities of directors).

·          trade creditors (who are necessary for on-going supplies and operations).

Most importantly, determine where the cash will be generated to finance the proposal for creditors.

From a cash-flow point of view, trigerring the creditor protection process should be done when you have the greatest war-chest with which to fight the battle.  You will need funds to continue operating your business and to pay for the professionals involved.

The funds in your possession, be they  accounts receivable you will collect, proceeds of asset sales, proceeds of any last minute financing for such an operation, all have to be planned for to provide you the widest room to manoeuver.

Timing is everything.  If you wait too long you may not have the ammunition to accomplish your goal. Once you begin, time is of the essence. 

When you get into a creditor protection process, you need to imagine what you want your company to look like when you get through it.  This is not meant to be a new-age visualization technique, but rather a tool to develop the end-goal of where you will be when the restructuring effort will be completed.

Don’t focus only on the balance sheet issues, but also on what your company will be able to do when you get through this restructuring.  This process will have two phases: the formal front-end and the rebuilding plan afterwards.  It is important that you have a clear objective that will allow you to sell the idea of your restructured business to your creditors and all the stakeholders.